Forex Margin Explained

Margin is the amount of your account balance that your broker “locks up” as a deposit when you open a leveraged position. It is not a fee, and it is not money you lose just for opening the trade — it is collateral that sits against your position for as long as the trade is open, and it is released back to your available balance when you close it.

How margin is calculated

Margin requirement is simply the inverse of the leverage ratio. If your broker offers 30:1 leverage on a pair, the margin requirement is 1/30, or about 3.33% of the position’s full value. On a $50,000 position, that means $1,666.67 of margin is required. If leverage were 10:1 instead, the same $50,000 position would require $5,000 of margin — a larger slice of your account set aside for the identical trade.

Three margin terms worth knowing

Trading platforms show several numbers that can look similar but mean different things:

• Balance — the cash in your account before any open positions are considered.
• Equity — your balance adjusted in real time for the floating profit or loss on any open positions. This number moves tick by tick while a trade is live.
• Used margin — the total margin currently locked up across all your open positions.
• Free margin — equity minus used margin. This is what you have left over to open new positions, or to absorb further losses on existing ones before running into trouble.

Why margin exists

From the broker’s side, margin is a safety buffer. Because you are trading with borrowed exposure, the broker needs assurance that if the trade moves against you, there is enough of your own money in the account to cover the loss before it becomes the broker’s problem. Margin requirements are set so that, under normal conditions, a position can be closed out before losses exceed what you deposited.

What happens as a trade moves

As a position’s floating loss grows, it eats into your equity, and because used margin stays fixed for that position size, free margin shrinks. If free margin keeps falling, you will eventually run into a margin call and, if the position still is not closed, a stop out — both of which are covered in detail in a separate article on this site. The short version: margin is not a one-time cost, it is a running relationship between your account’s equity and the exposure you are carrying, and it needs to be monitored for as long as a leveraged position stays open.

A worked example

Suppose you have $5,000 in your account and open a position requiring $1,000 in margin, leaving $4,000 free margin. If that position then loses $3,500 on paper, your equity falls to $1,500, while used margin for that position is still $1,000. Free margin has dropped to $500. You still technically have margin above the requirement, but very little room left to absorb further adverse movement — which is exactly the kind of situation that leads to a margin call if the trade keeps moving the wrong way.

Margin requirements differ by instrument and broker

Margin is not uniform. It depends on the leverage cap that applies to the instrument (majors, gold, indices, shares and crypto all carry different limits under EU/UK ESMA-derived rules), and brokers can also apply their own, stricter margin requirements on top of the regulatory minimum, especially around high-impact news events or on less liquid instruments. Reading a broker’s margin schedule before trading is a basic piece of due diligence worth doing for any account you are considering.

Key takeaways

• Margin is collateral held against an open position, calculated as the inverse of the applicable leverage ratio.
• Equity and free margin move constantly with the market; used margin stays fixed per position until it is closed or resized.
• A shrinking free margin balance is the direct early warning sign of an approaching margin call.